The trend has emerged just as the spread between bond yields and commercial real estate returns hit a record high. Research from Knight Frank shows sales transactions of CBD office buildings slumped by more than 40 per cent in the first half of the year to $1.49 billion.

Matt Whitby, the firm’s national director of research and consulting, attributed the turnaround to the soaring dollar, intensifying pessimism over the global economic outlook, as well as the sudden rise in the withholding tax for managed investment trusts.

He pointed out that so far this year a mere 23 CBD office properties have been sold. That compares to an annual average of about 70 over the past three years.

These dwindling investment volumes are most acute in Sydney with
Macquarie Group
’s $150 million purchase of 48 Martin Place, the forrmer old State Savings Bank building, ranking as the largest single asset acquisition in 2012.

Ian Hetherington, Savill’s director of capital transactions in NSW, blamed the deathly silence in the market – outside of related party transactions – on a lack of “confidence".

While he described investment levels in the city as the “worst I have seen in 20 years," he predicted investor activity will erupt again in the next few months with some billion dollars’ worth of deals likely to be inked by Christmas.

A half stake in One Martin Place, which Macquarie Group will leave at the end of 2014, is among the large-scale assets that could be offered to the market. The investment bank’s departure has resulted in the tower’s valuation tumbling to $425 million from $465 million in a recent valuation. It is thought
Charter Hall Group
’s vehicle, the 1MPT trust, which owns a 50 per cent slice of the property might consider selling its slice.

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The reduction in the book value may also prompt greater interest in the building as many in the sector claim the sluggish sales volumes are a result of a mismatch in price expectations between sellers and buyers.

GPT Group
’s decision to withdraw its half share in the iconic MLC skscraper in Sydney’s city centre is the most high profile example of this discord.

According to senior sources, Blackstone was keen to purchase the Harry Seidler designed building, but refused to submit a bid because the trust had signalled it would not budge from its $373.2 million book value.

Charles Moore, fund manager of the Commonwealth Office Property Fund (CPA) argued this “discipline" around pricing is unlikely to ease and pointed out the thinner transaction volumes are “logical" given the nervousness around the economy.

He claimed the current conditions meant the value of each asset would be driven by its “underlying cash flow" .

As revealed earlier this month by The Australian Financial Review, CPA is likely to lose its major tenant, Commonwealth Bank at 385 Bourke Street, which could, in turn, lead to a fall in the building’s book value.

However, any drop across the overall portfolio may be offset by a recent five-year leasing deal at the trust’s Perth property in Colin Street.

The resource-rich cities continue to lure investors, with Brisbane recording a sharp increase in sales volumes in the past six months. CPA snapped up a skyscraper there last month and DEXUS is rumoured to be close to a purchase. However, many in the market expect the deal pace to weaken in the second half.

James Quigley of Colliers said some investors had begun to question the depth of the commodity boom.

Knight Frank’s research shows that transaction volumes in both Perth and Melbourne have also tapered off in 2012, following a flurry of activity in 2011.

But a dearth of prime grade property could spur investor demand in the second half.

The problem is the same favourable borrowing rates that are expected to tempt back buyers have also enabled sellers to retain stock in the expectation values in the market will improve.

CBRE’s Rob Sewell said financiers were much more willing to lend on mid-tier assets on attractive terms. “What we probably need to see in the second half is more confidence by some of the people holding this money," he said.